With around 44 million renter occupied properties in the United States according to the National Multifamily Housing Council, it’s no wonder that many see investing in rental property as a smart business decision.
If you have a passion for real estate and an eye for amazing properties, rental property investment can be a career on its own or a great way to earn both (somewhat) passive and active income on the side of a full time career. You might see someone sell a home for cash and want to pick it up ASAP for some cash as a rental.
Before you get into this world, though, it’s extremely important to understand the basics. Otherwise, you could very likely lose money and get yourself into a tricky situation.
In this post, we’re going over some rental property investment basics by explaining the four profit centers of rental properties.
Let’s get started.
What Is a Profit Center?
Profit centers are defined as areas of a business, company, or investment that affect the profits of the business as a whole. Different profit centers are basically treated as separate smaller business entities that come together to amount for the total profitability of the business or investment.
In the case of investing in rental properties, there are four distinct profit centers you should know about:
Cash Flow
This can be one of the most profitable areas of a rental property, but only if you have a complete understanding of the value of the property, how to run your investment, and how you can maximize profits on a specific property.
With rental properties, you’re likely going to want to fill those properties with tenants or renters. In order for the property to have a positive cash flow, you’ll need to be smart about what properties you buy, the location, the number of renters, and more.
You also need to take into account any expenses that come up with this part of your investment business. Rental properties require upkeep and maintenance.
Things wear down, they need inspections, renters make mistakes and break things, you might want to hire landlords who will require payment, property services like trash and plowing, etc.
All of these things factor into whether you’ll have positive or negative cash flow for your property or properties.
In short? While many think that it will be easy to start making passive income with any old rental property, understanding whether you should buy a home or property is a complex decision that should be shaped by running numbers, understanding value, and knowing the necessary expenses of a property like the back of your hand.
Are you concerned about your cash flow? Need cash fast?
You can sell your home as is to get cash in your pocket ASAP. Learn more here.
Increased Equity from Mortgage Pay-Down
When you purchase a rental property with a mortgage, many tenant and lease agreements between you and renters include the mortgage payments as a factor in the monthly rent.
Yes, that means that your renters or tenants (as long as you have them, that is) are essentially paying your mortgage for you.
Each rent payment they make (hopefully every month) goes towards paying down your mortgage on the property. Your mortgage payment should be lower than the cost of your tenant’s monthly rent, since other expenses are likely to come up that you’ll be responsible for as the owner. As time goes on, if you play your cards right, more and more of the mortgage will be paid off by tenants, thus increasing your own equity.
Tax Benefits
Many people consider real estate and rental property investing to be the “best” in terms of your tax benefits and situation. Why?
Essentially, the IRS allows certain write-offs for the entire useful life of the rental property. This includes property repairs, depreciation and other reasons. Learn more about the specifics and guidelines on this on the IRS website, as there are many specifics and qualifications you’ll need to understand.
Along with the write-offs, there are rebates and incentives that rental property owners can implement to often pay little or nothing in taxes on the income from their property.
Appreciation
Appreciation is defined as the increase in value over time, meaning that certain properties can be bought at one price and be worth much, much more as time goes on.
It’s important to note that not every property will appreciate value over time. Many will depreciate or gain no value whatsoever.
Whether your property will appreciate value depends heavily on:
- The real estate market at the time you buy and at the time you sell
- The city/location the property is located in
- How much you bought the property for
- The overall condition of the property
- The style and appearance of the property
- And much more
It’s funny that one of the most important profit centers in rental property investing is appreciation of value over time when the IRS gives you a write-off for depreciation. While appreciation isn’t guaranteed, oftentimes depreciation is.
That’s why it’s so crucial to do your research, understand the market, and really understand the property before diving into an investment.
Make a Smart Rental Property Investment
Rental property investing can be a great way to make serious money and have an awesome career in real estate. However, it’s no walk in the park. It can take many months or years of experience and research to get to a place you want to be.
We want to help you reach your real estate goals. With our years of experience working in all aspects of real estate, Growing Edge Properties can help you buy a home, sell a home, or do anything in between.
Contact us to ask any questions or to partner up with us today!